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Rating action

Scope Ratings has today assigned a first-time issuer rating of BB- with Stable Outlook to Marso Kft. The agency also assigned a first-time rating of BB to senior unsecured debt issued by Marso Kft.

Rating rationale

The issuer rating mainly reflects the high market share of the Hungarian wholesaler. Scope views interest cover as a support to the rating, but consider the low profitability, negative free operating cash flow and weak diversification as negative rating drivers. The senior unsecured debt is rated BB.

Marso benefits from its dominant position in the niche sector of wholesale tyres, holding close to 25% of the Hungarian market. This is supported by strong, long-term relationships with worldwide suppliers (including Continental, Michelin, Bridgestone) as well as the high amount of exclusive products (close to 50% of total sales), which significantly decreases substitution risk. The wholesaler also has high market recognition via its progressive integration of customers, through franchisee Marsoponts, the Marso partner network, representing close customers benefitting from a wide range of exclusive products, and the Marso online dealer programme, which offers tyres and rims on an online platform. While Marso’s market share is well anchored within the country, the relatively small size of its business and low potential for expansion are detrimental to the rating.

Weak diversification is putting pressure on the rating, with Marso active in only one sub-sector (automotive-related). Moreover, despite a large share of sales abroad (20%), the highest country exposure represents a mere 5% of total sales, too small to offset any negative macro developments in its home market of Hungary. On the other hand, Marso’s presence in most of the sales channels (online/offline and B2B/B2C) is positive despite their limited ability to generate revenues. Marso management has clearly indicated an aim to maximise market shares at the expense of profitability. This strategy has been evidenced in the company’s margins, which are lower than those of rated peers and competitors. Despite the risks posed by relatively high seasonality (winter tyres changed twice yearly), Scope recognises a positive development of the margins, also helped by the company purchasing stock months in advance to take advantage of forex rate movements. The absence of a clear forex hedging strategy could impact profitability should the macro situation deteriorate for a long period.

We used a proxy of a factor 4 to calculate the operating lease assessment, as the company reports its financial data under Hungarian GAAP and is not expected to switch to IFRS into the medium term. Operating leases represent the largest part of Scope-adjusted debt (SaD) and refers to rent paid for shops owned by Marso Holding Kft.

Marso’s financial risk profile is supported by high interest cover, due to low net interest expenses as a consequence of the high interest received from group entities. Scope expects interest cover to fall significantly below its historical double-digit level before stabilising at above 6x, due to the upcoming bond issuance. The bond proceeds will be used towards i) repaying the totality of Marso Kft’s loans; and ii) building two new warehouses (planned to be operational by 2021). Scope expects a significant deterioration in leverage until 2020, measured as funds from operations (FFO)/SaD and SaD/Scope-adjusted EBITDA (respectively: 1.7x and 52% in 2018; 2.1x and 43% in 2019; and 3.25x and 25% in 2020). Scope forecasts a slight recovery from YE 2020 onwards once the warehouses are operational and contribute to margins. Lastly, as expected for a company in an investment phase, free operating cash flow (FOCF)/SaD is expected to remain under pressure for the medium term.

While the investment phase will put liquidity under pressure going forward, the repayment of the loans, via the future bond’s proceeds, will eliminate short-term payment obligations. The low FOCF generation is expected to put pressure on the liquidity.

The senior unsecured rating takes into consideration Marso Holding Kft, an entity with no equity link to Marso Kft but whose shareholders are the same as the rated entity’s. This is justified due to i) the system of cross-guarantees between the two; ii) Marso holding Kft’s ownership of the shops operated by the franchisee of Marso Kft. Marso plans to issue an HUF 3.6bn unsecured bond in October/November 2019 under the MNB Bond Funding for Growth Scheme. This instrument will be split into three tranches (nominal HUF 1.2bn each) maturing respectively in 2027, 2028 and 2029. Based on our recovery assessment, liquidation value estimates and a hypothetical default in 2020, Scope calculates an above average recovery, granting a one notch uplift from the issuer rating.

Rating-change drivers

The Stable Outlook reflects our expectation of i) the prospective bond’s successful issuance by YE 2019 and its planned usage of bond proceeds mainly for refinancing of the debt of Marso Kft and for starting the investment phase; and ii) leverage metrics of around 3x for the coming two years.

A positive rating action might be triggered if the SaD/EBITDA fall below 2x on a sustainable basis.

A negative rating action could be triggered if SaD/EBITDA increases to above 4x on a sustainable basis.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodology used for this rating(s) and/or rating outlook(s), Corporate Rating Methodology, is available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rating was not requested by the rated entity or its agents. The rated entity participated in the rating process. Scope had access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Adrien Guerin, Analyst
Person responsible for approval of the rating: Henrick Blymke, Managing Director
The ratings/outlooks were first released by Scope on 7 October 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings. 

Conditions of use / exclusion of liability
© 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

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